On the one hand, staking ensures the security of the blockchain network, and on the other hand, it brings passive income to investors. A method of earning on cryptocurrencies, similar to a bank deposit, serves as an alternative to mining in blockchains based on the Proof-of-Stake (PoS) algorithm.
Projects using PoS pay rewards and trust the transaction processing to validators who place their tokens in the system. Validators are required to have free and often serious funds, as well as install special software and maintain its uninterrupted synchronization with the network. But it is not necessary to fulfill these conditions to participate in staking. You can rely on an intermediary: for example, a cryptocurrency exchange, a pool of validators, or a wallet.
Many platforms today offer a percentage for the allocation of assets. The various staking plans differ in terms of deposit time, interest rate, and amount of assets available. Some sites offer flexible staking or variable rate deposits. The term for depositing funds starts from 1 day, any number of coins can be sent to such a deposit.
Fixed rate staking plans offer a fixed percentage of profits. But since staking is done using smart contracts, the duration of staking depends on the specific blockchain network. Also, fixed rate programs require a certain minimum number of tokens to be deposited.
What risks do investors bear when placing assets
Staking is a risky type of investment. Like any new actively developing area, it attracts a lot of scammers. Most often this applies to young projects that offer suspiciously high interest rates. Also, in many projects that were widely advertised at the start, the real profitability turned out to be much lower than the nominal one. At the start of staking, the price of a coin can be much higher than at the final settlement. In such cases, investors receive practically nothing, and many operate at a loss.
A good example is the Cosmos token (ATOM). The duration of his staking plan is 6 months and the rate of return is listed as 8%. For six months, the price of the token fell from $40 to $8 (5 times), which eventually led to losses, despite the income expressed in ATOM tokens. When choosing a stake, it is important to look at which platform you are placing your assets on, said the founder of the international forum TerraCrypto and Satoshi Spirit. “For example, if you trade on an exchange or use staking within a centralized platform, then you should remember that these are not your assets,” the expert says.
When choosing a project for which staking is declared, for example, on the company’s website or on a separate page, it is imperative to check with the team whether this is an official offer in order not to fall for phishing, Vassev believes. He stressed that one issue can save their assets. “It is worth remembering that there are different staking models. For example: placed coins – you get additional ones. Here the team determines the generosity of the reward,” the expert explained.
According to him, there are more complex mechanics when you can earn income from the platform commission by placing the main coin and additional ones. “It is always worth looking at the period of blocking of coins, and whether they can be taken away before the pledged period or not. Will the percentage for this be reduced,” Vassev warned. The founder of the TerraCrypto forum added that you should definitely check the official websites of the projects so as not to send assets to scammers.
The main risk of losing all funds is the hacking of the project’s smart contract, according to a senior analyst at BestChange. He noted that there are a huge number of examples, including among large, high-profile projects with large and experienced development teams. “Due to their specific nature of work, smart contracts remain quite risky. The fact is that once a smart contract is published on the blockchain, it can no longer be finalized and close the security gap if it is found in the future.”
He noted that another risk is the theft of funds when using centralized exchanges and platforms. “Relatively speaking, any custodial project can disappear overnight along with all the money and its founders. And sometimes the same platform can be hacked with the theft of part of the unlocked funds, ”the specialist specified. He pointed out that another feature of staking is the locking of funds. To receive income, it is necessary to freeze your investments for a certain time period. “If we consider the specific consequences, then on the one hand, this is the risk of lost profits, and on the other hand, the risk of losing the value of one’s assets due to a fall in prices,” the expert specified.
According to him, it is not at all uncommon for the price of a token to drop during staking, and in the end, the value of assets, together with the reward for staking, may turn out to be less than the value of the funds invested initially.
When staking, you take on two main risks, according to a cryptanalyst and a private trader.
“Firstly, the platform you choose can go bankrupt, steal your assets or freeze them under the pretext of sanctions. Secondly, your cryptocurrency can become cheaper at times, because of which you will lose much more than you can earn.” He explained that at the same time, the profitability of staking is usually no more than 10-15%, which is clearly not enough to cover the named risks.
The analyst believes that in order to minimize the likelihood of losing money, it is extremely important to choose only reliable platforms. For example, exchanges that are in the top 10 of the rating. “You should not keep coins on dubious services for the sake of an additional couple of percent profitability. In addition, it is safer to place exclusively recognized stablecoins such as USDT, USDC, BUSD and DAI,” the expert explained.
He pointed out that many top exchanges periodically offer users deposits in stablecoins with a yield of 7-10% per annum. “However, due to good returns and low risks, there is a great demand for such products. Therefore, you need to follow the news of the platforms in order to have time to take advantage of the promotions.